Geopolitical fragmentation and trade

Abstract

What are the economic consequences of geopolitical fragmentation on trade? We answer this question by using a canonical general equilibrium trade model to quantify the trade and welfare effects stemming from world trade fragmentation along geopolitical borders. To calibrate the size of the increase in trade costs, we use a new aggregate measure of trade restrictions that spans over the last 70 years and includes up to 157 countries and estimate the impact on trade of very broad trade policy restrictions in a theory-consistent structural gravity framework. We estimate that a fragmentation into three different trade blocs (Western, Eastern, Neutral)—defined according to how countries voted on the suspension of the rights of membership of the Russian Federation in the United Nations Human Rights Council because of the invasion of Ukraine— would have important effects on trade between them, reducing trade flows by 22%–57%, in the most extreme scenarios. Welfare losses would be the largest in the Eastern bloc, where the median country would experience a welfare loss of up to 3.4%.